The Levy Institute recently released a research paper I co-wrote with Stephanie Kelton, Scott Fulwiler, and Catherine Ruetschlin that models the macroeconomic impact of cancelling all of the student debt that is currently outstanding in the United States—just over $1.4 trillion, held by between 40 and 50 million borrowers. The federal government would write off the debt for which it itself is the creditor (the majority of outstanding student loans), and it would assume payments on behalf of borrowers for those loans that are held by private lenders. The population’s student loan balance would be reduced to zero—a radical solution to the student debt crisis, but one that deserves serious attention, given the radical scope of the problem.
The paper finds that student debt cancellation would be modestly stimulative to the macroeconomy, increasing annual GDP by $86 to 108 billion per year. It would increase the demand for labor and therefore slightly reduce the unemployment rate. The crucial mechanism driving the macroeconomic results is that the debt currently weighing down the balance sheets of households and individuals would be transferred to the federal government, which is an efficient reallocation from a macroeconomic perspective since it enables households to spend more, provided that the federal government itself is not financially constrained. Since the macroeconomic models we use assume to varying degrees that it is not (a correct assumption, as a previous paper by my Roosevelt colleague J.W. Mason points out), engaging in that fiscal expansion expands output through greater aggregate demand.
This weighs against the traditional terms in which policy solutions to the student debt crisis are debated: that they would be costly and displace spending on other federal programs. Given that student debt worsens household balance sheets, and that weakness is one of the key mechanisms holding back economic growth, it makes sense to expand the terms of the debate to macroeconomics and outside narrow budgetary calculations.
A recent paper by Daniel Herbst lends credence to these macro dynamics by looking at the effect of income-driven repayment (IDR) on microeconomic decisions and household balance sheets. IDR refers to a set of programs that reduce monthly payments on student loans to be a set percentage of income, and in some cases, cancels the outstanding balance after a certain period of making those payments has elapsed. Herbst finds that enrollment in IDR substantially reduces delinquency (as intended), but it also increases repayment rates by better aligning payments with income and ensuring that temporary cash shortages don’t cause default. The increase in repayment is evidence against the notion that reducing indebtedness would have a moral hazard effect by inducing borrowers to take on too much debt (or fail to repay the debt they have) in the expectation that it will be cancelled. IDR also increases borrower credit-worthiness and, likely, homeownership.
Given that full cancellation has never been tried, the best options we have for predicting its economic effects are to either examine the impact of the closest analogs to the policy that have actually been attempted (however imperfect), as Herbst’s paper does, or model full cancellation in the context of a more general theory. The Levy Institute paper does the latter.
There’s no doubt that full student debt cancellation is an ambitious policy—although, I would point out, it amounts to around the same size in net dollar costs to the government as the recent tax giveaway to the rich, although with a very different beneficiary population. Hence, student debt cancellation would have a much better macroeconomic impact. But the reason why such policies of cancelling (or, less ambitiously, refinancing) student debt have been controversial in the past, at least among higher education scholars, is not their expense, nor their purported effect on the macroeconomy—whether positive or negative. Similar policy proposals have faced two main critiques: that they are inequitable and that student debt is not actually burdening the economy, because the education it buys increases earnings for those borrowers. Both of those critiques are much less true than they are commonly believed to be.
New data from the Department of Education illustrates why these critiques are overdrawn, and it underscores the urgent need for debt relief to borrowers, for whom the bargain inherent in student debt has not paid off.
The Racial Dimension of Student Debt and Student Debt Cancellation
One thing that immediately becomes clear upon investigation of the student debt crisis is the extent to which it is a creature of this country’s legacy of racial discrimination, segregation, and economic disadvantage patterned by race. My prior research with Kavya Vaghul found that zip codes with higher population percentages of racial minorities had far higher delinquency rates, and that the correlation of delinquency with race was actually most extreme in middle-class neighborhoods. What this tells us is that student debt is intimately bound up with the route to financial stability for racial minorities.
In that work, we ascribe this pattern of disadvantage to four causes: segregation within higher education, which relegates minority students to the worst-performing institutions, discrimination in both credit and labor markets, and the underlying racial wealth gap that means black and Hispanic students have a much smaller cushion of family wealth to fall back on, both to finance higher education in the first place and also should any difficulty with debt repayment arise. The implication is that while higher education is commonly believed to be the route to economic and social mobility, especially by policy-makers, the racialized pattern of the student debt crisis demonstrates how structural barriers to opportunity stand in the way of individual efforts. Insisting that student debt is not a problem amounts to denying this reality.
Median wealth of households headed by black individuals between the ages of 25 and 40 in successive waves of the triennial Survey of Consumer Finances, with and without student debt. *Credit to Matt Bruenig for preparing these data from the SCF.
Median wealth of households headed by white individuals between the ages of 25 and 40 in successive waves of the triennial Survey of Consumer Finances, with and without student debt. *Credit to Matt Bruenig for preparing these data from the SCF.
Looking at the time series of median wealth for households headed by black and white people between the ages of 25 and 40 (what we refer to as “white households” and “black households”) in successive waves of the Survey of Consumer Finances (SCF) reveals these racialized patterns. Overall, and as is well-known, black households have far lower levels of wealth than white households, and in percentage terms, their wealth declined far more in the Great Recession and ensuing “recovery” than did the wealth of white households. These charts break out median wealth with and without student debt, and what they show is that while student debt has been increasing as a burden on household balance sheets, that worsening pattern is more pronounced for young black households than for young white households. By this measure, the racial wealth gap (the ratio of the median wealth of white households in that age range to the median wealth of black households in that age range) is approximately 12:1 in 2016, whereas in the absence of student debt, that ratio is 5:1.
Moreover, while overall net household wealth levels for the non-rich increased between the 2013 and 2016 waves of the SCF for the first time since the Great Recession did violence to middle-class wealth, rising student debt weighed in the other direction—especially for black households. The time trend from these charts is clear: Student debt is increasingly burdening everyone, but that burden disproportionately weighs on black households.
Why? A 2016 paper by Judith Scott-Clayton and Jing Li offers clues, since it tracks the debt loads of black and white graduates with four-year undergraduate degrees. They find that immediately upon graduating, black graduates have about $7,400 more in student debt than their white counterparts. Four years after graduating, that gap increases to $25,000. The crucial difference is simply that white graduates are likely to find a job and start paying down their debt, more-or-less as the system is designed, but black graduates are not—they carry higher balances, go to graduate school (especially at for-profit institutions) and thus accumulate more debt, and subsequently earn no better than whites with undergraduate degrees.
What this suggests is that any given educational credential is less valuable to blacks in a discriminatory labor market (probably because they attended less well-regarded institutions with weaker networks of post-graduate opportunity, and also because even assuming they did attend the same institutions as their white counterparts, outcomes for black graduates in the labor market are mediated by racial discrimination). As Scott-Clayton and Li write, “These increases occur alongside evidence of growing racial gaps in college graduates’ labor market outcomes, suggesting graduate school may for some students be a response to the weak post-recession labor market.” Indeed—credentialization is a particular strategy used to navigate a discriminatory labor market without a cushion of family wealth, and student debt is the residue of that strategy. The assumption that debt-financed educational credentialization represents constructive wealth-building and social mobility thus reflects a failure to comprehend the landscape of race-based economic exclusion.
The Benefits of Student Debt Cancellation Extend Beyond High-Income Borrowers
The reason that debt cancellation is considered to be inequitable is that the largest balances are held by the highest-income borrowers. This is undoubtedly true. But what this observation about the cross-section of debtors obscures is the ways that student debt has crept into the far corners of the economy and “trickled down” the income distribution in the years that the total stock of debt has exploded, i.e. since the mid-2000s—as the charts from successive SCF waves show. The reason for that vast enlargement of the population of borrowers is the worsening labor market. Scarce jobs are allocated to the most credentialed applicants, which triggers a rat race of credentialization, and that rat race is worst for minorities. That young cohorts are better educated than their predecessors should result in higher lifetime earnings, if the “skills gap” mythology that motivated the expansion of the federal student loan programs were true. Instead, more and more expensive credentials result in jobs that pay the same or worse, leading to the escalation of debt loads.
Crucially, thanks to increases in tuition, people who would have graduated with little or no debt had they been born in previous cohorts now take on positive balances. And thanks to credentialization, people who would have entered the labor market without degrees in the past now must obtain them, and thus take on debt, in order to get a job. Both dynamics benefit higher education institutions, discriminatory and predatory credit market participants, and powerful employers, which thrive in a segmented market where a captive population must pass through their tollbooth to get to the middle class. These dynamics increase the share of the population with student loan balances greater than zero. Thus, the distribution of borrowers with those positive balances has changed a great deal as the student debt crisis has intensified—a fact that is ignored by analysis that presupposes the pool of student loan borrowers has remained demographically and economically the same over time.
Student debt used to be a mark of the relatively-rich: something that was necessary only for well-paid professionals who spend a long time obtaining a lucrative graduate degree that likely pays off in the form of a high and stable salary over a lifetime. What the worsening labor market, credentialization rat race, and withdrawal of state support for public higher education has done is shift the distribution of people with a positive student loan balance toward the poor, or at least, the much-less-rich. It is still true that the highest balances are carried by the highest-income debtors, but debt cancellation would nonetheless benefit a broad swathe of the public—a swathe that has been victimized by misguided labor market policy, which is what the expansion of the federal student loan programs amounts to.
Scott-Clayton recently followed up her 2016 work by examining the 2017 Department of Education’s report referred to above. It utilizes two waves of the Beginning Postsecondary Students Survey to analyze how progression through higher education and student loan repayment differs both between the cohort who entered postsecondary education in 1995-1996 and in 2003-2004, and by race. The study finds that the more recent cohort took on substantially more debt and has had a harder time paying it off, thanks to the weaker labor market that the latter cohort graduated into. And crucially, delinquency and default are prevalent among black borrowers, even those who complete their degrees. Scott-Clayton goes so far as to offer projections that the cumulative 20-year student loan default rate for the 2003-2004 cohort will top 40 percent—an eye-opening suggestion, since it would mean that nearly half of the people who take on student debt ultimately can’t pay it off.
Collectively, these findings underscore several takeaways that challenge the conventional wisdom about student debt and higher education: simply ensuring completion of a higher education credential does not guarantee successful labor market outcomes, because those deteriorating outcomes for recent cohorts and young workers have nothing to do with their own education. In that context, the result of increasing higher education attainment and rising student debt is simply credentialization. And at a more macro level, the labor market is not characterized by a skills gap. The idea that it was, and that it could be solved by debt-financed higher education credentials, constitutes a macroeconomically significant misdiagnosis and false prescription—one that has been especially detrimental to the interests of minority borrowers, since it cheapens the value of the credentials they rely on to navigate the economy against a background of racial gaps in wealth and social capital. Thus, while complete debt cancellation may appear to be a radical solution, a radical solution is what the status quo requires.
Also published on Medium.